Policies addressing the looming existential threats to humanity, such as climate change or loss of biodiversity, are still mostly seen as a burden on short-term profit, even though these longer-term risks are becoming more and more financially material. If victorious, Biden can truly make a difference if he dares to set aside the short-term interests of Wall Street and implements ambitious measures focusing on long-term well-being.
It is common knowledge that for a long time Wall Street’s single focus was a reckless search for profit in order to maximise shareholder value. 'Greed was good', resulting in an unhealthy bias towards the short term. Accompanied by a free-market capitalism also singularly focused on quantitative growth, this cocktail created some of the most pressing issues we are facing today: climate change, biodiversity loss and rising inequality. Currently, a longer-term, stakeholder-oriented approach seems to become more mainstream, with both corporations and investors reporting and communicating extensively on environmental, social and governance (ESG) issues and emphasising the importance of stakeholder values. However, this has unfortunately not resulted in significantly more sustainable behaviour: even before the outbreak of COVID-19, it became clear that achieving the world’s 2030 Sustainable Development Goals would not happen before 2080.
Indeed, at the end of the day Wall Street remains preoccupied with promoting hyper-capitalism in order to maximise short-term profits. In the meantime, severe longer-term risks such as climate change continue to be inadequately priced into aggregate equity valuations. The rationale underlying Wall Street’s preference for a presidential candidate also confirms this. For most of the year, a Biden victory was generally perceived as undesirable, as it would likely entail rising corporate tax rates and tighter regulations. Trump, on the other hand, hinted at further tax cuts and has shown to be a fierce proponent of prolonged central bank easing and deregulation. During his presidency, Trump has systematically put financial market performance first, rather than what is most important for the average US household: the real economy. Public debt reached new all-time highs even before the COVID-19 pandemic and monetary policy has reached unprecedented territory. This made him a Wall Street favourite, as his re-election seemed the best guarantee to further shape the economy to the wishes of hyper-capitalism.
Change of heart
More recently, however, the absence of a new fiscal stimulus package and Joe Biden’s increased lead in the polls made Wall Street change its mind. Suddenly, a ‘blue wave’ election result, with Democrats winning both the presidency and the Senate, became the desired outcome for investors. In this scenario, a new, huge stimulus package to mitigate the COVID-induced recession is expected to be delivered by early 2021. Since the Republicans have opted for a far smaller fiscal package, a Democratic win offers the better outlook for short-term gains and hence became the desired outcome for Wall Street.
It is no secret that Biden’s longer-term plans are more in line with the world’s Sustainable Development Goals and the Paris Climate Agreement. His USD 2 trillion climate plan aims for an emissions-free power sector by 2035. He has also recognised that the monopoly power of the Big Tech companies undermines democracy and is likely to implement stricter antitrust laws. Redistribution, for instance through an increase in the corporate income tax rate is indeed one of his ideas to finance his plans. In the short term, however, these measures will likely hurt financial market performance. Yet the polls indicate that the average US household realises that financial market performance has become a poor guide to the health of the real economy. This year, unemployment rates and equity markets simultaneously reached record-highs. US households are therefore best served with longer-term measures that target the real economy and aim for long-term wellbeing, instead of attempts to further push up financial markets. Eventually, Wall Street would also benefit from more forward-looking policies that address the flaws of hyper-capitalism. Otherwise, the consequences, such as natural disasters and increased social unrest, would make it nearly impossible to guarantee some basic form of business continuity, which is a precondition for the current way of investing.
If the polls are right this time, Biden would be wise to implement policies that force investors to adequately price in the imminent long-term risks. This will lead to different investment decisions and reconnect financial markets with the real economy. By the time of the next elections, ambitious policies like Biden’s climate plan will then hopefully be seen in a different light and longer-term, non-financial risks would be adequately priced. Investors will have come to realise that decisive steps towards a more sustainable and socially inclusive world are vital for both short- and long-term profits. Wall Street would then again favour the candidate with such a program, but this time for the right reasons.